United States Dollar: The dollar weakened across the board yesterday as a result of news from the Federal Reserve concerning fresh stimulatory measures, or quantitative easing mark 2 (QE2). The Fed, who had been previously talking down the size of the stimulus package, unveiled plans to buy $600 billion of government bonds over the next 8 months, with the additional inclusion of maturing assets, bringing the total purse to a possible $850 – 900 billion worth of asset purchases. Policy makers mentioned keeping rates at ultra-low levels for an extended period, and added that the use of QE would become a common policy tool, rather than an emergency back-up plan. Purchases will be directed at bonds with maturities between 5 and 8 years, causing yields at the long end of the curve to rise, but yields below 10 years to fall. The US dollar suffered as a result, due to both increased inflation expectations, and the confirmation of cheap borrowing rates for a protracted period. Trading in GBP/USD was very volatile around the announcement as investors picked through the minutiae of the plan, and traded as low as 1.6040 before rallying to levels above 1.6140. We open this morning at 1.6120.
– We expect a range today in the GBP/USD rate of 1.6000 to 1.6250
Euro: The Euro benefitted from this flight to yield and increased risk appetite as investors found comfort in the fact that dollar borrowing rates would stay extremely low. Despite growing fears regarding Ireland’s budget deficit and its ability to pay interest on its debt the Euro marched to a 10 month high at levels above 1.4150 against the US dollar. There are worries that Ireland will struggle to pass the 2011 budget, and introduce ultra austere spending plans which may ultimately choke growth. There is speculation that the European Central Bank will delay withdrawing stimulus at today’s meeting, in an attempt to protect access to short term funding for struggling economies. GBP/EUR fell yesterday, as investors preferred to hold Euro’s instead of Pounds after the announcement from the Fed. Given that the Euro had sold off so much during the early part of 2010, many are talking of further upside potential, and a move back to levels seen in 2009 when the Euro almost hit parity against the Pound. Until then there are plenty of Euro specific risks that may make such a move difficult in the long term.
– We expect a range today in the GBP/EUR rate of 1.1320 to 1.1450
Aussie and Kiwi Dollars: The Aussie smashed through parity after the statement from the Fed and continued its march higher, reaching levels beyond 1.0060. This comes despite weaker than expected retail sales figures, which came in at 0.3% versus an expectation of an increase of 0.5% for the month of September. This figure will make little difference to policy in the near term, as many expect the RBA to keep rates on hold until 2011. In New Zealand the Kiwi also rallied on the news, pushing to levels beyond 0.7880, levels not seen since May 2008. New Zealand’s finance minister Bill English has drawn attention to this, stating that his nation’s currency is under pressure from both the US and China, whittling away at the competitiveness of its exports. He added that, “we are concerned that the currency pressures are going to build”. Better than expected unemployment figures added to the attractiveness of the Kiwi, with the unemployment rate dropping to 6.4% versus an expected drop to 6.7%.
– We expect a range today in the GBP/AUD rate of 1.5950 to 1.6150
– We expect a range today in the GBP/NZD rate of 2.0430 to 2.0630
Data Releases:
- AUD: RBA Monetary Policy Statement
- EUR: PPI
- GBP: MPC Rate and Statement
- NZD: No data of note
- USD: Labour costs / Unemployment Claims
